Question

# Sweet Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested...

Sweet Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing \$3,201,000 of 9% term corporate bonds on March 1, 2017, due on March 1, 2032, with interest payable each March 1 and September 1, with the first interest payment on September 1st, 2017. At the time of issuance, the market interest rate for similar financial instruments is 8%.

selling price of bonds = [Present value of annuity factor * (interest payment) ] + [present value factor * (face value)]

here,

present value of annuity factor = [1 - (1+r)^(-n)] / r

here,

r = market interest rate =>8% =>0.08.per annum =>0.08/2 =>0.04.

n = number of periods => 15 years * 2 semi annual periods = 30 periods.

=>[1 - (1.04)^(-30)]/0.04

=> 17.292032

interest payment = face value * stated interest rate *1/2

=>\$3,201,000 * 9% *1/2

=>\$144,045.

present value factor = 1 /(1+r)^n

=>1 /(1.04)^30

=>0.30831867.

face value of bond = \$3,201,000

now.

the selling price of bond = [\$144,045 *17.292032] + [\$3,201,000*0.30831867]

=>\$2,490,830.75 + 986,928.063.

=>\$3,477,758.81.

the given bonds must be selling at \$3,477,758.81.

#### Earn Coins

Coins can be redeemed for fabulous gifts.